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ADVANCE SHEET HEADNOTE
March 24, 2008
No. 06SC257, Old Republic Insurance Company v. Ross: stipulated
judgments -- Bashor agreements -- prejudgment interest -postjudgment interest.
The supreme court affirms the court of appeals decision in
Old Republic Ins. Co. v. Ross, 134 P.3d 505, 512 (Colo. App.
2006) that, on the facts presented, a stipulated judgment
arising from a settlement agreement entered into by the Rosses
and the defendant-insureds is not enforceable against Old
Republic.
The supreme court holds that where the insurer has
conceded coverage and defended its insured, and where there has
been no finding of bad faith against the insurer, the insurer
cannot be bound by a pretrial settlement agreement and
stipulated judgment to which it was not a party.
The court then
concludes that postjudgment interest cannot be imposed on the
unenforceable stipulated judgment.
The court reverses the court of appeals’ decision that Old
Republic is obligated to pay the Rosses prejudgment interest on
the $1.5 million in coverage that was unpaid until the
conclusion of federal declaratory judgment proceedings.
The
supreme court holds that, because prejudgment interest is
subject to policy limits in personal injury cases, Old
Republic’s obligation was discharged when it paid policy limits.
2
Case No. 06SC257
SUPREME COURT, STATE OF COLORADO
Two East 14th Avenue
Denver, Colorado 80203
Certiorari to the Colorado Court of Appeals
Court of Appeals Case No. 04CA1985
Petitioner/Cross-Respondent:
OLD REPUBLIC INSURANCE COMPANY,
v.
Respondents/Cross-Petitioners:
JAMIE L. ROSS, individually and as
children, JAYLIE B. ROSS and JAIDA
individually and as natural parent
ROSS, TESSA M. ROSS, STARR L. ROSS
ROSS; and BRANDI ROSS.
natural parent of minor
S. ROSS; CRYSTAL L. ROSS,
of minor children JON TALON
and CASH D. ROSS; AMBER ANNE
JUDGMENT AFFIRMED IN PART AND REVERSED IN PART
EN BANC
MARCH 24, 2008
Davis Graham & Stubbs LLP
Andrew M. Low
Rudy E. Verner
Elizabeth H. Titus
Denver Colorado
Grund, Dagner & Nelson, P.C
John W. Grund
Della S. Nelson
Denver, Colorado
Attorneys for Petitioner/Cross-Respondent
Zarlengo, Mott, Zarlengo & Winbourn, P.C.
Zane Moseley
Denver, Colorado
Attorneys for Respondent/Cross-Petitioner Crystal L. Ross
Schaden Katzman Lampert & McClune, P.C.
Bruce A. Lampert
Broomfield, Colorado
John D. McClune
Troy, Michigan
Attorneys for Respondent/Cross-Petitioner Jamie L. Ross
Cage Williams P.C.
Mark W. Williams
Melissa M. Kerin
Denver, Colorado
Attorneys for Amicus Curiae Property Casualty Insurers
Association of America
Roberts Levin & Patterson, P.C.
Bradley A. Levin
Denver, Colorado
Attorneys for Amicus Curiae The Colorado Trial Lawyers
Association
JUSTICE RICE delivered the Opinion of the Court.
2
This case arises out of an airplane accident near Durango.
The passengers’ surviving spouses and children (“the Rosses”)
brought a wrongful death action in state court against the
airplane charter company, its president, and the pilot’s estate.
Old Republic Insurance Company (“Old Republic”) insured the
charter company and its president (collectively “the defendantinsureds”), but was not originally a party in the state court
action.
In a separate federal proceeding, Old Republic sought a
declaratory judgment to determine its coverage obligation to the
defendant-insureds.
Old Republic Ins. Co. v. Durango Air Serv.,
Inc., 283 F.3d 1222, 1223 (10th Cir. 2002).
In the case at
hand, Old Republic appeals the court of appeals’ decision in Old
Republic Ins. Co. v. Ross, 134 P.3d 505, 512 (Colo. App. 2006),
that Old Republic is obligated to pay the Rosses prejudgment
interest on the $1.5 million in unpaid coverage ascertained by
the federal court.
On cross appeal, the Rosses contest the
court of appeals’ conclusion that a stipulated judgment arising
from a settlement agreement entered into by the Rosses and the
defendant-insureds is not enforceable against Old Republic.
The
Rosses ask us to reinstate the trial court’s garnishment order
awarding postjudgment interest on the stipulated judgment.
We first consider the trial court’s award of postjudgment
interest, based on the stipulated judgment, which was vacated by
3
the court of appeals below.
We examine the enforceability of
the stipulated judgment and the underlying settlement agreement
in light of our decision in Northland Insurance Co. v. Bashor,
177 Colo. 463, 494 P.2d 1292 (1972).
We hold that under the
facts of this case, where the insurer has conceded coverage and
defended its insured, and where there has been no finding of bad
faith against the insurer, a stipulated judgment entered before
trial, to which the insurer is not a party, cannot be enforced
against the insurer.
We thus affirm the court of appeals’
holding that the stipulated judgment is unenforceable, and
conclude that Old Republic cannot be liable for postjudgment
interest on that unenforceable judgment.
We next examine
whether the court of appeals retained jurisdiction over Old
Republic after invalidating the stipulated judgment, such that
it could award prejudgment interest to the Rosses.
Without
drawing a conclusion on the jurisdiction question, we ultimately
hold that there is no legal basis for the imposition of
prejudgment interest in excess of policy limits in this case.
We thus reverse the court of appeals’ prejudgment interest
award.
I. Facts and Proceedings Below
When this wrongful death litigation began, Old Republic
paid the Rosses $200,000, asserting that this was the maximum
coverage available under the defendant-insureds’ aviation
4
policy.
Old Republic disputed coverage under the defendant-
insureds’ comprehensive general liability policy (“CGL policy”),
which had a policy limit of $1 million.
Old Republic rejected
the Rosses’ settlement offer of $800,000, then sought a
declaratory judgment in federal district court to confirm that
its obligation to the defendant-insureds was fulfilled by the
$200,000 payment.
The district court concluded that the maximum
coverage under the relevant policies was $1.7 million, and the
Tenth Circuit Court of Appeals affirmed.
at 1228.
Old Republic, 283 F.3d
Old Republic then paid the Rosses an additional $1.5
million, or $1.7 million less the initial $200,000 payment.
Meanwhile, during the declaratory judgment proceedings, the
Rosses entered into a settlement agreement with the defendantinsureds, under which the defendant-insureds consented to the
entry of judgment against them in state court for $4 million
plus prejudgment interest, resulting in a total judgment of $5.3
million.
As consideration for this settlement, the Rosses
agreed not to enforce the stipulated judgment against the
defendant-insureds, and the defendant-insureds agreed to
prosecute claims against Old Republic for the collection of the
judgment.
The Rosses and the defendant-insureds agreed that if
the defendant-insureds’ suit against Old Republic was
successful, the Rosses would receive the full amount of the
stipulated judgment, and the defendant-insureds would retain any
5
compensatory damages awarded above the amount of the judgment.
Any punitive damages awarded would be shared between the Rosses
and the defendant-insureds.
Old Republic was not a party to
this settlement agreement.
The state district court accepted
the agreement and entered judgment against the defendantinsureds for $5.3 million.
As a result of the state and federal cases, there were now
two judgments: the state court stipulated judgment for $5.3
million and the federal court declaratory judgment for $1.7
million.
Having paid the full extent of the policy according to
the declaratory judgment, Old Republic paid nothing pursuant to
the stipulated judgment.
Old Republic maintained that, even had
it not fulfilled the policy limits, it could not be bound by the
stipulated judgment because it was not a party to the underlying
settlement agreement.
Pursuant to the settlement agreement, the defendantinsureds sued Old Republic for bad faith breach of insurance
contract via counterclaims in the federal declaratory judgment
proceeding.
However, the defendant-insureds eventually
dismissed their counterclaims in order to expedite the
declaratory judgment.
The Rosses then commenced a garnishment
proceeding in state court to collect postjudgment interest on
the stipulated judgment from Old Republic.
The Rosses claimed
that Old Republic owed postjudgment interest on the stipulated
6
judgment of $5.3 million, less the $200,000 payment, from the
date of the stipulated judgment to the date when Old Republic
paid its policy limits shortly after the declaratory judgment.
According to the Rosses, Old Republic’s obligation for
postjudgment interest arose from two different sources.
First,
the Rosses sought postjudgment interest arising from the
supplementary payments provision in Old Republic’s CGL policy,
which states that the insurer is required to pay, on any
judgment entered against it, interest on the entire judgment for
the period after entry of the judgment until the insurer has
paid that part of the judgment which does not exceed policy
limits.
Next, because Old Republic did not make this interest
payment pursuant to its CGL policy at the time it paid policy
limits, the Rosses claimed that, pursuant to section 5-12-102,
C.R.S. (2007), Old Republic owed additional statutory interest
for “wrongfully withholding” the unpaid interest.
This
statutory interest would be comprised of interest on the unpaid
interest, accruing from the date Old Republic paid policy limits
until the eventual date Old Republic complied with the
garnishment order being sought by the Rosses.
The trial court
agreed with the Rosses on both counts, and entered a garnishment
order against Old Republic for approximately $2 million in
postjudgment interest over and above the policy limits
previously paid.
7
Old Republic appealed the garnishment order, claiming that
there was no valid judgment on which to garnish interest.
The
court of appeals adopted Old Republic’s analysis, holding that
the stipulated judgment was not binding on Old Republic in light
of the circumstances under which it was entered.
The court held
that the Rosses could not rely on Bashor, 177 Colo. 463, 494
P.2d 1292, for the enforceability of the judgment,
indicating
that Bashor agreements are not recognized outside of the context
of bad faith insurance litigation.
The court also stated that
Bashor agreements are entered into after a valid judgment has
been obtained against the defendant, not before trial.
The
court of appeals then evaluated the stipulated judgment (the
court called it the consent judgment) for circumstantial
guarantees of trustworthiness.
The court concluded that, by
initiating an expedited garnishment proceeding rather than
litigation against Old Republic, the Rosses were attempting to
collect a judgment via “legal maneuvering,” without affording
Old Republic the right to defend its interests.
134 P.3d at 512.
Old Republic,
The court thus declared that the stipulated
judgment and underlying settlement agreement were unenforceable
against Old Republic, and that Old Republic could not be liable
for postjudgment interest on the unenforceable judgment.
Acting sua sponte, however, the court of appeals held that
Old Republic was liable for prejudgment interest, over and above
8
its policy limits, on the portion of coverage that was unpaid
until after the federal declaratory judgment.
Because the
federal court ultimately determined that Old Republic was
obligated to pay $1.5 million in additional coverage over its
initial $200,000 payment, the court of appeals asserted that
this $1.5 million was “wrongfully withheld” during the pendency
of the federal action.
Id.
The court of appeals thus held
that, pursuant to section 5-12-102, Old Republic owed
prejudgment interest on the $1.5 million.
Ultimately, the court
of appeals remanded the case to the trial court for a
determination of the amount of prejudgment interest due.
Both the Rosses and Old Republic petitioned this court for
certiorari. 1
1
The Rosses seek reinstatement of the trial court’s
We granted certiorari on the following four issues:
(1) Whether the court of appeals’ ruling, that under
section 5-12-102, C.R.S. (2007), a liability insurer must
pay a tort plaintiff prejudgment interest beyond policy
limits, conflicts with this Court’s holding in Allstate
Insurance Co. v. Allen, 797 P.2d 46 (Colo. 1990).
(2) Whether
a
plaintiff,
who
fails
to
obtain
an
enforceable
judgment
against
a
defendant,
can
then
nonetheless compel a defendant’s liability insurer to pay
prejudgment interest to the plaintiff, pursuant to Section
5-12-102, C.R.S. (2007).
(3) Whether the court of appeals lacks jurisdiction to
order an insurer to pay prejudgment interest in an appeal
from a garnishment judgment, where the court invalidated
the underlying judgment on which the garnishment was based.
(4) Whether the court of appeals’ holding that the
settlement was not a valid Bashor agreement conflicts with
the supreme court’s decision in Northland Insurance Company
v. Bashor, 177 Colo. 463, 494 P.2d 1292 (1972).
9
order garnishing postjudgment interest, arguing that Old
Republic is bound by the settlement agreement and the ensuing
stipulated judgment.
Old Republic contests the court of
appeals’ award of prejudgment interest, arguing that the court
lost jurisdiction over Old Republic once it reversed the
garnishment order of the trial court below.
Old Republic
further argues that, even if jurisdiction was proper, the court
of appeals’ holding conflicts with Colorado law governing
prejudgment interest in personal injury cases.
II.
Postjudgment Interest
The Rosses ask us to reinstate the trial court’s
garnishment order for postjudgment interest owed on the
stipulated judgment.
As stated above, their claim for
postjudgment interest is based in part on the supplementary
payments provision in Old Republic’s CGL policy. 2
Old Republic
concedes that the policy obligates it to pay postjudgment
interest on a binding judgment, but counters that it cannot be
2
The CGL policy states:
The company will pay, in addition to the applicable
limit of liability:
. . . All costs taxed against the insured in any suit
defended by the company and all interest on the entire
amount of any judgment therein which accrues after
entry of the judgment and before the company has paid
or tendered or deposited in court that part of the
judgment which does not exceed the limit of the
company’s liability thereon . . . .
10
liable for postjudgment interest if there is no valid judgment
against it.
We agree that Old Republic cannot owe postjudgment
interest in the absence of an enforceable judgment, and thus
proceed by examining the validity of the stipulated judgment and
underlying settlement agreement.
Because we conclude that the
settlement agreement and stipulated judgment are not enforceable
against Old Republic, we affirm the court of appeals’ holding
that Old Republic owes no postjudgment interest on the
stipulated judgment.
The Rosses maintain that the stipulated judgment is
enforceable pursuant to this court’s decision in Bashor.
In
Bashor, we upheld a settlement agreement whereby an insured,
following entry of an excess judgment at trial, agreed to pursue
claims against its insurance provider and share recovery with
the original plaintiff.
177 Colo. at 465, 494 P.2d at 1293.
In
exchange, the plaintiff agreed to refrain from further efforts
to collect on the judgment from the insured’s assets.
We
allowed the insured to proceed with its claims against the
insurer, holding that the settlement agreement was not
“champterous, illegal, void, or contrary to public policy.”
at 466, 494 P.2d at 1294.
Id.
Since that case, the term “Bashor
agreement” has also been used to describe agreements whereby the
insured formally assigns its claims against the insurer to the
third party plaintiff in exchange for a covenant not to execute
11
on the insured’s assets.
See, e.g., Pham v. State Farm Mut.
Auto. Ins. Co., 70 P.3d 567, 570 (Colo. App. 2003); Pike v. Am.
States Preferred Ins. Co., 55 P.3d 212, 213 (Colo. App. 2002);
Rodriguez v. Safeco Ins. Co., 821 P.2d 849 (Colo. App. 1991).
Unlike the settlement agreement at hand, which was obtained
before trial, the agreement in Bashor was formed after the
plaintiff had obtained a judgment against the insured in excess
of the insured’s policy limits.
Nonetheless, the Rosses contend
that the enforceability of a Bashor agreement against an insurer
should not turn on whether the agreement was made before or
after trial.
They maintain that Bashor was intended to afford
insureds a mechanism for mitigating damages whenever an insurer
exposes the insured to a large excess judgment, and thus an
insured should not have to wait to protect itself from the risk
and cost of continued litigation.
In the Rosses’ view, Bashor
agreements are enforceable irrespective of when they are made,
so long as they are reasonable under the circumstances and free
from fraud and collusion.
Thus, the Rosses ask us to extend
Bashor to validate their pretrial settlement agreement and
stipulated judgment.
By contrast, Old Republic argues that Bashor cannot be
extended to make the settlement agreement at hand a valid
enforceable contract, because Bashor pertains only to settlement
agreements reached after trial.
When parties enter into a
12
Bashor agreement after a fully contested trial, Old Republic
notes, the damages have been determined by a neutral finder of
fact.
When the settlement occurs before trial, however, the
amount of the stipulated judgment is set by agreement between
the parties, none of whom has an interest in minimizing the
amount.
Old Republic argues that because the defendant is
protected by the plaintiff’s covenant not to execute, the
plaintiff can essentially dictate the amount of the judgment.
Thus, Old Republic urges us to hold that a pretrial stipulated
judgment entered in this fashion lacks circumstantial guarantees
of trustworthiness and is therefore not binding on the
defendant’s insurance carrier.
The enforceability of a pretrial stipulated judgment
against a third party insurer was not decided in Bashor, and is
an issue of first impression for this court.
Although the cases
are not precisely on point, our court of appeals has declined to
enforce pretrial stipulated judgments as “Bashor agreements” on
13
two occasions. 3
See Serna v. Kingston Enters., 72 P.3d 376
(Colo. App. 2003) (dismissing claims of negligent employee who
sought indemnification from her employer for stipulated judgment
entered pursuant to Bashor-like agreement between employee and
injured plaintiffs); Miller v. Byrne, 916 P.2d 566 (Colo. App.
1995) (rejecting insureds’ claim that measure of damages in
breach of contract action against insurer was the amount of a
stipulated judgment negotiated by insureds and wrongful death
plaintiff).
Although Serna involves a number of factual
distinctions which reduce its relevance to the case at hand, 4
both Serna and Miller reflect the concern that a pretrial
3
The court of appeals has decided several cases in which the
parties had entered into pretrial stipulated judgments, but the
enforceability of the stipulated judgments was not at issue.
See, e.g., Pham v. State Farm Mut. Auto. Ins. Co., 70 P.3d 567,
570 (Colo. App. 2003) (affirming partial summary judgment for
insurer that denied plaintiffs uninsured motorist coverage on
the basis that plaintiffs stood to recover in another pending
suit, filed pursuant to a Bashor agreement, which would resolve
status of motorist’s coverage); Pike v. Am. States Preferred
Ins. Co., 55 P.3d 212, 213 (Colo. App. 2002) (affirming summary
judgment for insurer based on lack of coverage in breach of
contract action filed by tort plaintiffs pursuant to Bashor
agreement with insureds); Rodriguez v. Safeco Ins. Co., 821 P.2d
849 (Colo. App. 1991) (same).
4
Serna involved a common law indemnity claim, a cause of action
which does not arise until the liability of the party seeking
indemnity results in his or her damage. 72 P.3d at 380. The
court of appeals held there that because the settlement
agreement involved made it highly unlikely that the defendant
would ever have to pay the stipulated judgment, and in light of
clear indicia of collusion between the plaintiff and defendant
whereby the defendant would actually profit from her negligence
under the terms of the settlement, the defendant’s employer
could not be forced to indemnify her. Id. at 381.
14
settlement between a plaintiff and an insured defendant “may not
actually represent an arm’s length determination of the worth of
the plaintiff’s claim.”
Miller, 916 P.2d at 581 (quoting Steil
v. Fla. Physicians’ Ins. Reciprocal, 448 So.2d 589, 592 (Fla.
Dist. Ct. App. 1984)); Serna, 72 P.3d at 381 (calling pretrial
stipulated judgment a “profit-sharing” arrangement).
In agreement with its prior precedent, the court of appeals
below held that the Rosses’ settlement agreement was not a valid
Bashor agreement, primarily because it was entered into before
trial.
Old Republic, 134 P.3d at 511.
Noting that the only
judgment entered against the defendant-insureds was the one to
which they stipulated, the court referenced a footnote in Stone
v. Satriana, in which we defined a Bashor agreement as “a
settlement reached between opposing parties after a judgment has
been obtained against the defendant.”
See id. (referencing
Stone, 41 P.3d 705, 708 n.2 (Colo. 2002)) (emphasis added).
The
court of appeals then compared the stipulated settlement
agreement to the “profit-sharing” agreement struck down in
Serna, based on the fact that it contemplated the defendantinsureds’ sharing damages awarded against Old Republic.
Republic, 134 P.3d at 511.
Old
Next, the court stated that Bashor
agreements are utilized in Colorado only in “bad faith insurance
litigation involving allegations of breach of duty to
indemnify,” and there were no claims for bad faith before the
15
court.
Id.
Finally, the court evaluated the “genuineness” of
the stipulated judgment by examining it for circumstantial
guarantees of trustworthiness.
We agree with the court of appeals’ conclusion that the
settlement agreement is not a valid Bashor agreement.
We find
no jurisdiction that would enforce a pretrial stipulated
judgment against an insurer who was not a party to the
underlying settlement agreement unless the insurer acted in bad
faith, denied coverage, or refused to defend the claim on behalf
of the insured.
We therefore decline to extend Bashor to
encompass a settlement agreement entered under these
circumstances.
The majority rule in states that have considered this issue
is that a pretrial stipulated judgment may be enforceable
against the defendant’s liability insurer if the insurer
breaches its contractual obligation to defend the insured.
See,
e.g., Hamilton v. Md. Cas. Co., 41 P.3d 128, 134 (Cal. 2002)
(“The denial of coverage and a defense entitles the policyholder
to make a reasonable, noncollusive settlement without the
insurer’s consent and to seek reimbursement for the settlement
amount in an action for breach of the covenant of good faith and
fair dealing.”); Black v. Goodwin, Loomis & Britton, Inc., 681
A.2d 293, 299 (Conn. 1996) (“An insurer who chooses not to
provide its insured with a defense and who is subsequently found
16
to have breached its duty to do so must bear the consequences of
its decision, including the payment of any reasonable settlement
agreed to by the plaintiffs and the insured.”); S. Guar. Ins.
Co. v. Dowse, 605 S.E.2d 27, 29 (Ga. 2004) (“An insurer that
denies coverage and refuses to defend an action against its
insured . . . becomes bound to pay the amount of any settlement
within a policy’s limits made in good faith . . . .”); Guillen
v. Potomac Ins. Co. of Ill. 785 N.E.2d 1, 13 (Ill. 2003) (same
holding); Red Giant Oil Co. v. Lawlor, 528 N.W.2d 524, 532-33
(Iowa 1995) (same holding); Griggs v. Bertram, 443 A.2d 163, 175
(N.J. 1982) (same holding).
Under the majority view, when an
insurer improperly abandons its insured, the insured is
justified in taking steps to limit his or her personal
liability.
The California Supreme Court’s recent opinion in
Hamilton cogently explains the rationale for this rule:
In effect, when the insured tenders the suit [against
the insurer for failure to defend], the carrier is
receiving its chance to be heard. Having rejected the
opportunity
and
waived
the
chance
to
contest
liability, it cannot reach back for due process to
void a deal the insured has entered to eliminate
personal liability.
41 P.3d at 135 (quoting Chris Wood, Note, Assignments of Rights
and Covenants Not to Execute in Insurance Litigation, 75 Tex. L.
Rev. 1373, 1399 (1997)).
A number of states have adopted a modification of the
majority rule, demonstrating a willingness to enforce pretrial
17
stipulated judgments under various enumerated circumstances.
See, e.g., Great Divide Ins. Co. v. Carpenter, 79 P.3d 599, 60910 (Alaska 2003) (holding refusal to defend not necessary;
stipulated judgment enforceable where insurer materially
breached its contractual obligation to the insured); Kelly v.
Iowa Mut. Ins. Co., 620 N.W.2d 637, 645 (Iowa 2000) (holding
stipulated judgment enforceable where insurer breached
contractual obligation to accept reasonable settlement);
Associated Wholesale Grocers, Inc. v. Americold Corp., 934 P.2d
65, 81-82 (Kan. 1997) (holding stipulated judgment enforceable
in case of wrongful coverage denial and refusal to settle within
policy limits); Besel v. Viking Ins. Co., 49 P.3d 887, 891
(Wash. 2002) (holding stipulated judgment enforceable where
carrier acts in bad faith); Gainsco Ins. Co. v. Amoco Prod. Co.,
53 P.3d 1051, 1079 (Wyo. 2002) (holding stipulated judgment
enforceable where insurer defends under reservation of rights
and declines an offer to settle within policy limits).
Several
states have held that a stipulated judgment can be enforceable
if the insurer defends the claim under a reservation of rights.
See, e.g., Safeway Ins. Co. v. Guerrero, 106 P.3d 1020, 1024
(Ariz. 2005); Patrons Oxford Ins. Co. v. Harris, 905 A.2d 819,
826-27 (Me. 2006); Miller v. Shugart, 316 N.W.2d 729, 733 (Minn.
1982).
In other words, if the insurer offers to defend the
claim, but also provides notice that it may decline coverage if
18
the claim is successful, the insured may opt to enter a
stipulated judgment rather than go through with the trial.
If
the coverage dispute is later resolved in the insured’s favor,
the stipulated judgment may then be enforced against the
insurer.
In sum, many states broaden the circumstances under
which a stipulated judgment may be enforceable, but none of
these states has enforced a pretrial stipulated judgment against
an insurer where the insurer has conceded coverage and defended
its insured, and where there has been no finding of bad faith
against the insurer.
Upon our review of the prevailing case law, we decline to
hold that pretrial stipulated judgments are per se unenforceable
under Bashor.
There may be circumstances where a stipulated
judgment is a defendant-insured’s only viable recourse against
an insurer that has acted in bad faith.
As the Supreme Court of
Alaska stated, “An insured that has been placed at economic risk
by its insurer’s breach should be allowed to protect itself by
shifting the risk to the breaching insurer without first
subjecting itself to potential financial ruin.”
Great Divide,
79 P.3d at 609.
We acknowledge the risk of fraud and collusion between the
plaintiff and the defendant-insured when the only judgment ever
obtained against the defendant is stipulated, and the existence
and amount of the defendant’s liability is determined by the
19
parties rather than by a neutral factfinder.
Where an insurer
has fulfilled its contractual obligation to the insured in good
faith, the risk of enforcing a collusive settlement is not
justified.
Where an insurer has wrongfully subjected its
insured to an excess judgment, however, the risk of collusion
may be tolerable in light of the “relative positions of the
parties.”
Justin A. Harris, Note, Judicial Approaches to
Stipulated Judgments, Assignments of Rights, and Covenants Not
to Execute in Insurance Litigation, 47 Drake L. Rev. 853, 875
(1999).
Furthermore, where an insurer has been found in breach
of contract or in breach of its duty to act in good faith, the
risk of collusion is balanced by the fact that the insured has
had to tender claims against the insurer.
The stipulated
judgment thus is not binding on the insurer until after an
adversarial proceeding before a neutral factfinder, providing
the insurer with an opportunity to advance its defense.
In the case at hand, Old Republic conceded coverage and
defended its insured, disputing only the extent of its liability
under the applicable policies.
No court has found Old Republic
in breach of its contract with the defendant-insureds, nor are
there any pending claims against Old Republic for breach of
contract or bad faith.
Although the Rosses repeatedly allege
that Old Republic committed bad faith by failing to settle
within policy limits when it refused the $800,000 settlement
20
offer, the Rosses have no standing to make this claim.
The
insurer’s “duty of good faith and fair dealing extends only to
the insured, not to the third-party.”
Co., 89 P.3d 409, 414 (Colo. 2004).
Goodson v. Am. Std. Ins.
Furthermore, during the
federal declaratory action, the defendant-insureds dismissed
their claims against Old Republic with prejudice.
Under the rule we adopt today, the stipulated judgment
would have been enforceable pursuant to a valid pretrial Bashor
agreement if the defendant-insureds had proceeded successfully
with any of their claims against Old Republic, 5 or if the
settlement agreement had provided for the assignment of claims
against Old Republic to the Rosses and the Rosses had
successfully litigated those claims.
Instead, the defendant-
insureds dismissed their claims with prejudice and left the
Rosses without standing to assert claims against Old Republic.
We agree with the court of appeals that the Rosses cannot wait
until they are out of options, then initiate an expedited
garnishment proceeding to accomplish by “indirection that which
could not be done directly.”
Old Republic, 134 P.3d at 512.
5
The defendant-insureds’ counterclaims in the federal proceeding
alleged causes of action against Old Republic for breach of
contract, willful and wanton breach of contract, negligence,
breach of covenant of good faith and fair dealing, and breach of
fiduciary duty. Old Republic, 283 F.3d at 1223-24.
21
We conclude that under the facts of this case, where the
insurer has conceded coverage and defended its insured, and
where there has been no finding of bad faith against the
insurer, a stipulated judgment entered before trial, to which
the insurer is not a party, cannot be enforced against the
insurer.
Because we affirm the court of appeals’ conclusion
that the stipulated judgment is unenforceable, the trial court’s
garnishment order for postjudgment interest on that
unenforceable judgment cannot stand.
Having held that the stipulated judgment is unenforceable
on these facts, we decline to adopt the remainder of the court
of appeals’ reasoning concerning the stipulated judgment.
As
stated above, the fact that the settlement agreement was entered
into before trial does not make it per se invalid.
Furthermore,
we disagree that the settlement agreement was the type of
profit-making arrangement struck down in Serna.
Under the terms
of the Rosses’ agreement, any recovery the defendant-insureds
made on their claims against Old Republic was to be distributed
to the Rosses to the full extent of the stipulated judgment,
plus interest.
Any compensatory damages above the amount of the
stipulated judgment plus one-half of any punitive damages award
would be paid to the defendant-insureds.
However, considering
that such damages would be awarded only if the factfinder
adjudged that the insureds actually suffered damages due to Old
22
Republic’s bad faith conduct, or if the factfinder determined
that Old Republic deserved to be punished for its conduct
towards its insureds, it cannot be characterized as an unfair
profit if the insureds were entitled to share those damages.
By
contrast, in Serna, the settlement agreement provided that the
defendant would share in the proceeds of the stipulated judgment
itself, meaning the defendant would receive a portion of the
damages flowing from the defendant’s own negligence.
378.
72 P.3d at
Finally, although a Bashor agreement must normally be
examined for evidence of fraud or collusion, because we hold
that the stipulated judgment is unenforceable on its face, we
need not review the court of appeals’ inquiry into the
reasonableness of the underlying settlement agreement.
III. Prejudgment Interest
We now turn to the court of appeals’ sua sponte award of
prejudgment interest in excess of Old Republic’s policy limits.
In awarding prejudgment interest, the court of appeals relied on
section 5-12-102, which states, “When money or property has been
wrongfully withheld, interest shall be an amount which fully
recognizes the gain or benefit realized by the person
withholding such money or property from the date of wrongful
withholding to the date of payment . . . .”
The court asserted
that Old Republic “wrongfully withheld” policy coverage during
the pendency of the declaratory action, and thus was liable for
23
prejudgment interest under section 5-12-102.
The court
acknowledged that Old Republic may have filed the declaratory
judgment with the good faith belief that its obligation had been
fulfilled with the initial $200,000 payment.
Ultimately,
however, the court concluded that Old Republic was nonetheless
liable for interest on all policy proceeds for which it was
eventually held responsible.
We hold that Old Republic’s
obligation was discharged when it paid policy limits, and
therefore reverse the court of appeals’ award of prejudgment
interest.
A. Jurisdiction
Before we analyze the court of appeals’ legal basis for
awarding prejudgment interest, we must first examine whether the
court had jurisdiction to issue the order in question.
Old
Republic emphasizes that the sole mechanism by which it was
brought before the trial court was a garnishment proceeding,
based on the stipulated judgment.
Old Republic argues that once
the court of appeals held that the stipulated judgment was not
binding, a holding we affirm, the court lost jurisdiction to
issue any garnishment order against it.
Old Republic relies on
Zurich Insurance Co. v. Bonebrake, in which this court held that
“[t]he existence of a valid judgment is a jurisdictional
prerequisite to garnishment relief.”
975, 976 (1958).
24
137 Colo. 37, 39, 320 P.2d
Acknowledging the absence of a binding judgment, the court
of appeals stated, “Wrongful withholding [under section 5-12102] only requires failure to pay or deliver money when
obligated to do so.”
Old Republic, 134 P.3d at 512 (citing
Peterman v. State Farm Mut. Auto. Ins. Co., 8 P.3d 549, 551
(Colo. App. 2000)) (emphasis added).
However, except to suggest
that Old Republic “agreed to indemnify defendants to the extent
of the determined coverage,” the court of appeals did not
identify the source of Old Republic’s obligation to pay, nor did
See id.
the court specify when the wrongful withholding began.
Old Republic asserts that it has never been under any obligation
to pay the $1.5 million balance of coverage.
Although the
federal declaratory judgment determined that the maximum amount
of coverage under the insurance policies was $1.7 million, Old
Republic argues that there was never any judgment against the
defendant-insureds or Old Republic to pay that amount.
Rather,
Old Republic claims that its payment of policy limits
immediately following the declaratory judgment was voluntary.
Because the court of appeals lacks jurisdiction to order
prejudgment interest unless the court has before it some breach
of an obligation to pay, we now examine possible sources for the
obligation implicitly recognized by the court of appeals.
insurance policies themselves cannot be the source of the
obligation in question, as the policies only require Old
25
The
Republic to pay the legal obligations of its insureds -- that
is, the obligations encompassed in the stipulated judgment to
which Old Republic is not bound.
Furthermore, the court of
appeals did not treat the federal declaratory judgment as the
source of the obligation.
Thus, we rely on the court of
appeals’ statement that Old Republic “agreed to indemnify” the
defendant-insureds to conclude that the court identified a new
contractual obligation -- outside the confines of the insurance
contract -- which bound Old Republic to pay policy limits.
In a portion of its opinion separate from its analysis of
prejudgment interest, the court of appeals examined a letter
written by Old Republic’s counsel.
This letter came before the
court because the Rosses argued that it evidenced Old Republic’s
consent to the settlement agreement and ensuing stipulated
judgment. 6
Although the court rejected the Rosses’ argument that
the letter bound Old Republic to the stipulated judgment, the
6
The letter, which was written to assuage the insureds’ concern
that entry of the stipulated settlement might constitute a
breach of their insurance contract, stated:
On behalf of Old Republic, we can assure you and your
clients that, if your clients wish to resolve the
litigation as you suggested, Old Republic has no
objection to that and will agree to indemnify your
insureds, but only to the extent of the determined
insurance coverage.
Old Republic Ins. Co. v. Ross, 134 P.3d at 505, 508 (Colo.
App. 2006).
26
court, without elaboration, found that the letter “show[ed] that
Old Republic agreed to pay plaintiffs under the insurance policy
if the parties entered into a settlement agreement.”
at 512.
134 P.3d
The court of appeals thus treated the letter as a new
contract obligating Old Republic to pay policy limits to the
Rosses upon their entry of a settlement.
Under this
construction, the letter obligated Old Republic to pay policy
limits more than three years before the federal declaratory
judgment was finalized.
We conclude that the court of appeals
relied on this letter when it determined that Old Republic
breached an obligation to pay policy limits.
The court of appeals’ reliance on the letter may have been
misplaced.
The letter is arguably no more than a unilateral
assurance by Old Republic to its insureds that Old Republic
would continue to honor its existing obligations under the
policies.
Furthermore, even if the letter did create a new
contract between Old Republic and its insureds, the Rosses are
not parties to the new contract.
However, we decline to further
address the jurisdiction question.
Rather, we conclude that,
even if there was a proper jurisdictional basis for the court of
appeals’ award of prejudgment interest, the court’s award of
interest in excess of policy limits was not legally justified.
As we will show below, Old Republic’s obligation to the
defendant-insureds was satisfied by the payment of policy
27
limits, and the award of prejudgment interest exceeding those
limits was improper.
B. Prejudgment Interest Is Subject to Policy Limits
in Personal Injury Cases
We hold that the court of appeals erred in its application
of section 5-12-102, which governs the award of prejudgment
interest in non-personal-injury cases only.
See Farmers
Reservoir & Irrigation Co. v. City of Golden, 113 P.3d 119, 133
(Colo. 2005).
By contrast, section 13-21-101, C.R.S. (2007),
provides for the award of prejudgment interest in personal
injury cases. 7
By treating this case like a breach of contract
case subject to section 5-12-102, the court of appeals
circumvented Colorado caselaw dictating that all damages arising
from personal injuries, including prejudgment interest, are
subject to relevant limits on damages in a defendant’s insurance
policy.
See, e.g., Allstate Ins. Co. v. Allen, 797 P.2d 46, 48
(Colo. 1990); Allstate Ins. Co. v. Starke, 797 P.2d 14, 18-19
(Colo. 1990).
Prejudgment interest in a personal injury case is an
element of compensatory damages, “awarded to compensate the
plaintiff for the time value of the award eventually obtained
7
Section 13-21-101 dictates that a party bringing a tort action
seeking damages for personal injuries may claim interest on the
damages alleged from the date the action accrued until
satisfaction of the judgment.
28
against the tortfeasor.”
Starke, 797 P.2d at 19.
As an element
of compensatory damages, prejudgment interest is subject to
relevant coverage limits in the defendant’s insurance policy.
Id.
For example, in Starke, prejudgment interest was awarded as
an element of compensatory damages in a wrongful death suit.
Id. at 21.
We held that the defendant’s liability insurer was
obligated to pay the interest, but only to the extent of the
defendant’s coverage for damages arising from personal injury.
Id.
By contrast, in a breach of contract action against an
insurer, an award of prejudgment interest would not fall within
the liability damage clause of the insured’s policy.
The policy
contractually limits the insurer’s obligation to shield the
insured from liability to third persons, but the insurer cannot
use that contract to shield itself from liability for its own
wrongdoing.
Peterman v. State Farm Mutual Auto Insurance Co., 8
P.3d 549, is an illustrative case.
There, the insureds brought
a breach of contract and bad faith action against the insurer
after it refused to pay out an uninsured motorist policy.
at 550.
Id.
After the insureds obtained a judgment against the
insurer, the court of appeals appropriately awarded prejudgment
interest in excess of policy limits.
Id. at 552.
The court
held that the prejudgment interest damages arose not from the
insured’s car accident, but from the insurer’s breach of an
29
obligation to pay.
The terms of the uninsured motorist policy
could not limit the insurer’s liability for its own wrongdoing.
Id.
The court of appeals treated the case at hand as one
involving a breach of contract, subject to Peterman.
However,
as stated above, the defendant-insureds dismissed all breach of
contract claims against Old Republic several years ago.
The
Rosses, who are not in privity of contract with Old Republic,
initiated the proceedings at hand, and the Rosses’ intention was
to recover damages arising from the airplane accident.
In this
context, a claim to prejudgment interest, allegedly accruing on
the stipulated judgment against the defendant-insureds, is a
claim for additional compensatory damages.
We reiterate our
holding in Allen and Starke that when the insurer is merely
indemnifying a judgment against the insured, the insurer cannot
be compelled to pay more than policy limits.
48; Starke, 797 P.2d at 18-19.
Allen, 797 P.2d at
Therefore, we hold that Old
Republic’s obligation was discharged when it paid policy limits.
IV. Conclusion
In sum, we hold that under the facts of this case, where
the insurer has conceded coverage and defended its insured, and
where there has been no finding of bad faith against the
insurer, the insurer cannot be bound by a pretrial settlement
agreement and stipulated judgment to which it was not a party.
30
Because the stipulated judgment is unenforceable, Old Republic
cannot be liable for postjudgment interest on the judgment.
Furthermore, because prejudgment interest is subject to policy
limits in personal injury cases, we reverse the court of
appeals’ award of prejudgment interest.
31
